Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development

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1 For Official Use DSTI/SU/SC(07)19 DSTI/SU/SC(07)19 For Official Use Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 14-May-07 English text only DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY STEEL COMMITTEE Cancels & replaces the same document of 09 May 07 CONSOLIDATION IN THE WORLD STEEL INDUSTRY - A LATIN AMERICAN PERSPECTIVE 18 May 07 Presentation by Mr. Breno Lucki, Gerdau Group. Roundtable on consolidation in the world steel industry, 18 May 07, Istanbul, Turkey. Anthony de Carvalho, Administrator, Structural Policy Division Tel: +(33-1) , Fax: +(33-1) , Anthony.decarvalho@oecd.org English text only JT Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

2 OECD Steel Roundtable on Consolidation in the World Steel Industry Consolidation in the World's Steel Industry: National / Regional Perspectives Breno Lucki Chief Strategy Officer Gerdau Group May 07 Turkey, Istanbul 1 1. Latin America Economy and Steel Industry 2. Competitive Challenges and M&A Activities 3. Gerdau Overview 2 2

3 Latin America Politically, Latin America is divided in countries; Second largest world territory (21,1 million of square Km) and the third largest population (528 million inhabitants); Fourth largest GDP after Nafta, European Union and Japan. GDP in 06 was USD 2,3 trillion for the region; Some countries are members of the Mercosur (Common markets of the south). Currently member countries are:,, Paraguay, and Venezuela, with Bolivia,,, Ecuador and Peru as associates and México as observer. 3 Latin America Population % 528 million people USD Million 107 Minimum Growth rate : 0,5% () Maximum Growth rate: 1,5% () 43,6 39, B razil Mexico V enezuela Bolivia Rest of the world 92% Latin America 943,6 GDP Billion US$ % US$ 2,3 trillion USD Billion 741,5 Minimum Growth rate: 2,9% Maximum Growth rate: 8,8% (Venezuela) 210,0 105,5 147, ,1 14,6 Mexico Data related to sample countries Venezuela Bolivia 95% Rest of the world Latin America Source: CIA The World Fact Book 4 3

4 Latin America Investment Rate - 06 Public Debt % of GDP % of GDP Mexico Venezuela Bolivia Average Mexico Venezuela Average Foreign Exchange - 06 Inflation Rate ,8 relative to USD 2, ,1 2, ,0 % consumer prices 3,1 3,4 4,3 10,0 2,6 4,3 6,5 6,3 Mexico Venezuela Bolivia Mexico Venezuela Bolivia Average Source: CIA The World Fact Book, IBGE 5 Latin America relative overview Population (million) GDP (US$ trillion) Investment Rate* Public Debt* Inflation Rate G ,9 European Union ,3 Latin America** 528 2,3 38 6,3 BRIC 2,7 Bi ,9 * Data as % GDP **Data related to most representative countries Source: CIA 6 4

5 Latin America: Crude Steel Production 06 World Production: 1,243Mt Latin America: 62 Mt; 5% of world production China: 34% of world production % 423 : 2,5% of world production 12 Biggest: 80% of world production % 8% % % China Japan USA Russia South Korea Germany India Ukraine Italy Turkey Taiwan Others Source: IISI Million tons 7 Latin America Steel Industry is the only Latin American country among the 12 biggest producers, being the 10th in the world, with a production of 31 million tons; Latin America s production represents only 15% of China s production; s steel industry has advantages relative to other countries. It is well placed, close to iron ore mines and has a logistics differential, based on railroad and ports availability; The crude steel consumption in many Latin American countries is considered low parallel to other countries, nevertheless higher economic growth rates and investments in infra-structure might increase those figures; Crude Steel Consumption - 06 Source: IISI, IBS, ILAFA Kg/ pop Bolivia Costa Rica Cuba Ecuador El Salvador Guate mala Honduras Me xico Nicaragua Panama Paraguay Peru Dominican R Trinidad & Tobago 2 36 V enez ue la

6 1. Latin America Economy and Steel Industry 2. Competitive Challenges and M&A Activities 3. Gerdau Overview 9 World Challenges The world has changed, welcome to the new world. 1. The Steel industry has undergone fundamental changes. It has moved from a state-owned business to a global private model through intense consolidation; 2. Occidental growth rate stagnation has pressed corporations to search for overseas opportunities and has accelerated M&A activities; 3. Efficiency, economies of scale, productivity e profitability are key priorities for corporate leaders; 4. Asset prices are high due to downstream and upstream movements, integrated approaches are high priorities in order to guarantee competitive advantages; 5. The new reality is exposing corporations to global matters, diverse political risks, evolving environmental regulations, work force unionization levels and to a global competitive arena. 10 6

7 Industry Changing Forces The world has changed, welcome to the new world Global Steel Production Steel replaces wrought iron, stainless steel developed Railways, phone lines, power grids built European Reconstruction Japan China BRICS to follow Corporations are exposed to: - Global political risk; -Environmental regulation; Industrialization Asia in the Spotlight - Competitive pressure size matters to achieve profitability; World Wars Reconstruction M&A to leverage competition Market consumption in the occidental side doesn't assure required growth Crude steel consumption growth is powered by China; China excess production is a threat to price levels and regional operators; Downstream and upstream integration as a positioning strategy to guarantee competitive advantage; Value added strategies depend on market proximity and product mix diversification; Crude Steel Growth Production - Mmt CAGR 00-06: 12,3% CAGR 00-06: 22,0% CAGR 00-06: 2,3% CAGR 00-06: -0,5% CAGR 00-06: 2,5% Europe* North America South America Asia China China was responsible for 33,8% of world steel production in 06, a very strong growth from the 15% in

8 00 1 Nippon 28,4 2 POSCO 27,7 3 Arbed 24,1 4 Ispat 22,4 5 Usinor 21,0 6 Corus,0 7 LNM 19,2 8 ThyssenKrupp 17,7 9 Baosteel 17,7 10 NKK 16,0 11 Riva 15,6 12 Kawasaki 13,0 15 US Steel 10,7 17 Nucor 10,0 21 Severstal 9,6 26 Gerdau 7,1 31 Kryvorizstal 6,1 41 Lucchini 4,8 42 CST 4,8 51 Dofasco 4, Mittal+Arcelor 1, Nippon 33,7 3 JFE Posco 31,2 5 Corus + Tata 24 6 Baosteel 22,5 7 US Steel 21,3 8 Nucor,3 9 Tangshan 19,1 10 Riva 18,2 11 Severstal 4 17,6 12 ThyssenKrupp 16,8 13 Evraz 16,1 14 Gerdau 15,6 Mittal: Ispat, ISG, LNM, Krivorozstal. Arcelor: Arbed, Usinor, Aceralia,CST, Acesita, Dofasco JFE: NKK + Kawasaki. Severstal: Lucchini, Rouge. Source: IISI, Metal Bulletin, Gerdau analyses 13 M&A Frame work Steel Sub-sectors Strategic Positioning Cash Returns Drive performance Steel High volume: -Size matters M&A drives industry consolidation; -Margins: move towards upstream integration; -Efficiency: low cost base, logistical synergies Steel High margin: -Efficiency: focus on high cash flow per tonne; -Margins: high value added products investment -Market proximity: suppliers and customers relations management Size: - Global players; - Various stakeholders dialog; - Investment phase Efficiency of production -Non-labor costs representing 2/3 of total cost; -Global and integrated operational approach; -Investment phase growing to maturity levels; -Transparency with stakeholders highly valued Margins: - High valued added process; -Secure upstream integration and suppliers relations; - Markets proximity; - Managing community relations 14 8

9 Motives driving consolidation decisions Consolidation is driven by several competitive pressures: 1. Country risk exposure; 2. Upstream and Downstream consolidation strategic positioning; 3. Market proximity and geographic diversification; 4. Access to financial markets, capital requirements; 5. Economies of scale, size matters; 1.Purchasing power, iron ore, scrap, other inputs; 2.Logistics proximity to markets; 3.Specialization of the production line intra-group 15 M&A key drivers - Latin America Consolidation is driven by several competitive pressures: Current Status Political risk exposure: Venezuela and Bolivia jeopardizing stability Economic volatility: stable economic overview, reduced exposure to global crises Foreign exchange valuation: most currencies are appreciated against the US dollar Demand volatility: markets are stable due to shy economic growth = - Access to financial markets: broader access is available Logistics: on spot conditions are deteriorating, proximity is a differential Strategic alliances with local players: solutions are developed to better service clients requirements Commercial life cycle risk: M&A activities to minimize exposure 16 9

10 Long Steel Industry Consolidation - Historic Overview: - In the last years the Industry in had to consolidate and heavily invest in technology and management capabilities in order to remain competitive Source: IBS Crude Steel - March07 Market Share 7,0% 5,0% 5,0% 1,0% 53,0% Barra Mansa Gerdau Villares Metals Belgo 28,9% Aços Villares V&M Brasil Long Rolled Products - March07 Market Share 7,0% 4,0% 6,0% 1,0% 47,0% Barra Mansa Gerdau Villares Metals Belgo 36,0% Aços Villares V&M Brasil 17 Competitive policy and M&A Competitive Policy:! Steel Industry concentration is subject to the same antitrust rules and regulations that apply to other industries. Regulators must guarantee transparency in the process.! Antitrust legislation has different levels of maturity among countries, The United States antitrust law, known as the oldest, has over a hundred years, while the ian law has no more than 13 years. Most of developing countries have maturing antitrust laws.! Under the current M&A scenario, net gains to stakeholders have to be pursued; companies should focus its efforts on value creation to the whole industry and customers

11 1. Latin America Economy and Steel Industry 2. Competitive Challenges and M&A Activities 3. Gerdau Overview 19 Gerdau: An International Company Total Capacity (Includes Strategic Shareholdings) 19.6 million tonnes of crude steel 17.4 million tonnes of rolled steel products Steel units Downstream operations Fabricated reinforcing steel facilities Flat steel service centers Retail facilities Scrap collection and processing facilities Iron ore extraction areas Solid pig iron production units Private port terminals Associated company Steel units Downstream operations Joint ventures Steel unit Downstream operations Fabricated reinforcing steel facilities Gerdau Group Headquarters 11

12 Gerdau: Solid Track Record 19,230 In thousand tonnes 21,955 3, Laisa () Barão de Cocais Cambridge (Canada) Usiba 3,934 Piratini AZA () 4,595 Manitoba (Canada) 4,568 Stake in Açominas 7,696 Ameristeel (USA) AZA New Plant () Additional stake in Açominas 11,076 Control of Açominas Co-Steel (USA) 16,372 North Star (USA) Araçariguama Sidenor (Spain) Sheffield (USA) Siderperú (Peru) 16,709 Diaco () Installed Capacity Expansion 19,580 GSB (Spain) Feld Group (Mexico) e e: estimated Installed Capacity of Crude Steel Abroad Installed capacity of Crude Steel 21 Gerdau Product Mix: Perspective 07 Billets Bars Bars Hot-rolled-coil Wire Wire-rod Profiles Cut and Bend Nail Welded Mesh Wire Rebar 22 12